Obama unveils $3.6 trillion deficit plan

WASHINGTON (MarketWatch) — President Barack Obama on Monday rolled out a $3.6 trillion deficit reduction plan that sought to bridge the gap between the two political parties by backing entitlement program reform supported by Republicans with increased taxes on the wealthy favored by Democrats.

Obama’s plan harkened back to the so-called “grand bargain” that he and Speaker of the House John Boehner almost reached earlier this summer that would cut long-term entitlement spending and raises additional tax revenue, though Republicans responded coolly to this fresh proposal.Read related story

“Today I am laying out a set of specific proposals to finish what we started this summer,” Obama said in a speech in the Rose Garden.

Obama said his plan would pay down “the big pile of IOUs” amassed over the last decade with $2 in spending cuts for every $1 in new revenues. The program would allow the country to start reducing its debt level by 2017, the White House said.

The proposal would hit “primary balance” in that year, where current spending is not longer adding to debt.

Under the White House plan, the national debt would fall to 73% of gross domestic product in 2012. If Congress took no action to cut spending, the debt would hit 90.7% of GDP, the White House said.

Obama said he was proposing cutting spending by scouring the budget for every dime of waste and inefficiency, reforming government spending and making modest adjustments to Medicare and Medicaid.

“We have to cut what we can’t afford to pay for what really matters,” Obama said.

But taxes must also rise, Obama said.

“We can’t just cut our way out of this hole. It is going to take a balanced approach,” Obama said.

Obama’s plan would raise $1.5 trillion in tax increases. More than half would come from the 2013 end of Bush-era tax cuts for Americans making over $250,000.

Obama will send his proposal to the congressional supercommittee that is tasked with finding $1.5 trillion in deficit savings by the end of November.

Obama’s proposal included fits into what analysts called a “go big” strategy because it includes controversial entitlement “savings,” along with tax increases and less defense spending from bringing U.S. troops home from Iraq and Afghanistan.

Many Congressional Democrats had hoped Obama would not propose savings to Medicare and Medicaid.

The White House said 90% of the savings from Medicare would come from reducing overpayments. The plan does not propose to raise the eligibility age for Medicare benefits.

“I will veto any bill that changes benefits for those who rely on Medicare but does not raise serious revenues by asking the wealthiest Americans or biggest corporations to pay their fair share,” Obama said.

Obama said changes to the Social Security program should be on a separate track.

The key for breaking Washington gridlock, analysts said, is whether Republicans will bend from their current stance opposing any revenue in the form of higher taxes. As it now stands, if the Republicans block tax hikes, Democrats are not expected to go along with entitlement changes.

On Sunday, House Budget Committee chairman Paul Ryan said it was “constructive” that Obama included entitlement savings in his plan, but complained the savings did not go far enough.

Boehner said last week that he would not any tax hikes under the supercommittee process.

While designed as an opening bid for debate over the deficit, Obama’s plan had a political component aimed at the next presidential election campaign in 2012.

For instance, the proposal included “five principles” for the supercommittee to consider on raising revenue, including a so-called “Buffett rule” that said millionaires should not pay a smaller share of their income in taxes than middle-class families pay. Berkshire Hathaway Chairman Warren Buffett has publicly advocated for higher tax rates for wealthy individuals like himself.

Leading Republicans pounced on the Buffett rule.

Ryan called the proposal “class warfare” that may be good politics but is “rotten economics.”

Obama took issue with this characterization. He said the choice was whether to increase taxes on the wealthy and business or cutting back on popular services for the middle class and poor.

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